TMS fracking slows as operators watch oil prices

9th February 2015   ·   0 Comments

By Susan Buchanan
Contributing Writer

When crude oil prices sank this winter, companies scaled back fracking plans in the Tuscaloosa Marine Shale deposit, running from central and southeast Louisiana into Mississippi. Exploration and drilling there is mostly on hiatus until crude rebounds, industry members said last week. Oil dropped a bit below $44 a barrel on the New York Mercantile Exchange in late January from over $100 last summer. In early February, prices were edging up again.

TMS activity has slowed to a snail’s pace for the most part, Baton Rouge-based mineral rights consultant Dan Collins said last week. Capital spending by companies, including Goodrich Petroleum, Encana Corporation and Halcon Resources, will be smaller this year than initially planned, he said.

Horizontal drillers access oil and gas reserves in “tight” formations of nearly impervious rock, Collins said. “They get the majority of their production out in the first 18 to 24 months, and after that output tapers off dramatically,” he said. If oil prices stay weak for awhile and the nation’s drilling activity shrinks, U.S. oil inventories could decline sharply within 18 to 36 months. Collins said oil industry members think prices might shoot up in response then. And crude would bounce if Organization of the Petroleum Exporting Countries, led by Saudi Arabia, decides to limit production, he said.

Alberta, Canada-based Encana is scaling back its TMS activity for now and concentrating on deposits elsewhere. “Given the price environment, this year we’re spending about 80 percent of our capital on key areas that provide us the best returns—the Montney and Duvernay in Canada and the Eagle Ford and Permian in Texas,” Encana spokesman Doug Hock in Denver said last week. “In the TMS, we expect to spend between $50 million and $70 million and to drill two to five net wells this year. Last year in the TMS, we drilled about twelve net wells and spent over $100 million in capital.”

As for oil’s price impact on its employment, “Encana had about a 20-percent, corporate-wide staff reduction at the end of 2013, putting us in a better position than some others in the industry,” Hock said. “No layoffs are currently contemplated.”

Houston-based Goodrich Petroleum on Jan. 30 said it will spend $90 million to $100 million overall on exploration and drilling this year, including roughly $10 million on leaseholds and infrastructure. That’s down from its spending projection in early December of $150 million to $200 million. Most of Goodrich’s drilling and completion budget this year will be oil oriented.

Goodrich remains fairly upbeat on the TMS, however, saying in late January that its entire, oil-directed allocation is to that deposit, where its well costs have declined. “We will spend $73 million to $93 million in the TMS this year to fund a one-to-two-rig drilling program, with varied working interest wells,” investor relations director Daniel Edwards Jenkins at Goodrich said last week. That’s versus the company’s projected TMS spending of $137.5 million to $180 million in early December. “We’re spending almost all dollars to drill about 11 gross TMS wells,” he said.

What about plans by New Orleans-based Helis Oil & Gas Co. to drill northeast of Mandeville? “The company’s first proposed TMS fracturing project, off of Highway 1088 in St. Tammany, hasn’t been fully permitted yet,” Helis spokesman Greg Beuerman said last week. “No exploration or production activity is associated with it yet. The price of oil, however, has no bearing whatsoever on plans to move ahead with the well’s permitting and completion, in alignment with legal and regulatory requirements.”

Beuerman said current oil prices don’t affect what Helis believes will be a productive project that helps reduce dependence on unstable foreign sources, while keeping gasoline prices low.

But for the industry as a whole, fracking slows with crude at $75 to $80 a barrel, and it continues to decline as oil dips under $75, Robert Gilmer, director of University of Houston’s Institute for Regional Forecasting, said at a Nov. 20 institute symposium. He cited a survey of 100 North American oil producers last fall by Houston-based energy investment bankers Tudor Pickering, Holt & Co. “Only four percent of the survey’s respondents indicated their forward-planning price for oil was under $75 a barrel,” Gilmer said.

Some oil-directed fracking would occur at $65 to $70 per barrel, however, keeping the industry busy enough, Gilmer said last week. “Everyone expects to see $80 oil again,” he added.

Texas-based Comstock Resources wants oil at $80 or more to resume its TMS activity. “TMS is on hold for us now,” Gary Guyton, the company’s investor relations director, said last week. “We don’t plan to drill anymore there until oil prices improve. I believe we’d need to see $80 to $85 a barrel or higher before we would consider drilling.”

To protect themselves in advance against price changes, fracking companies can use oil and natural gas futures and options markets to hedge bets, by taking positions that are opposite their physical positions. “Some of the companies have hedged their oil sales, and some may still be receiving higher than spot-market prices, which might help them through the oil price downturn,” Collins said. But Comstock’s Guyton said his company hasn’t hedged its TMS production. Several other operators last week declined to say whether they’re hedged.

In northwest Louisiana, fracking has depended on natural gas prices, which collapsed in late 2011 and remain weak, Gilmer said. Haynesville shale drilling near Shreveport is mainly for natural gas, while TMS drilling along the south Louisiana-Mississippi border is mostly for oil. “The current downturn in oil-directed drilling should help natural gas prices,” Gilmer said. “That’s because much of the recent natural gas output has been as a byproduct associated with oil. And plans to export natural gas to foreign customers through major projects at Lake Charles, Sabine Pass and Freeport, Texas should also help get natural gas prices back up.” Billions of dollars in new LNG or liquified natural gas facilities and shipping terminals along the south Louisiana-Texas border have been announced in recent years.

Oil-oriented TMS drilling is in its infancy while the Haynesville play has languished since gas prices dropped several years ago, Greg Albrecht, chief economist with Louisiana’s Legislative Fiscal Office, said last week. Louisiana produces over 60 million barrels of oil annually, however, and every $1 a barrel decline in oil prices over a fiscal year reduces state revenues by $12 million, he said.

This article originally published in the February 9, 2015 print edition of The Louisiana Weekly newspaper.